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New Research on Inner City Economic Development Just Released

Written by Kim Zeuli and Haifeng Qian

A special issue of the academic journal Economic Development Quarterly (EDQ) devoted to inner city economic development has just been released online. This special issue revisits a February 1997 EDQ article, “New Strategies for Inner City Economic Development,” written by ICIC’s founder and chairman, Harvard Business School Professor Michael E. Porter. The following summary of the three articles included in the special issue is excerpted from an article published in October 2015 in the W.E. Upjohn Institute for Employment Research’s Unemployment Research Newsletter.

Connecting Regional and Inner City Cluster Performance

In their paper titled “Clusters and Regional Performance: Implications for the Inner City,” Mercedes Delgado and Kim Zeuli evaluate Michael Porter’s 1997 premise that inner city job creation could be facilitated by strengthening the connection between the inner city and its regional clusters. Inner city policy prescriptions for job creation typically focus on incentives to attract businesses to certain neighborhoods, but Porter argues that integrating inner cities into the cluster composition of their regions is a more effective job creation strategy. Prior research finds that a strong regional cluster increases employment and innovation growth as well as startup activity within the cluster.

Delgado and Zeuli’s research measures cluster specialization at different levels of geography within an urban region: the inner city, the surrounding central city (outside the inner city), and the rest of the region (i.e., the metropolitan statistical area [MSA] outside the central city). The authors hypothesize that inner city industries, and hence job creation, will grow faster if surrounded by a strong cluster of related industries in the inner city. This effect will be more pronounced if the same cluster is also strong in the central city and MSA.

The research adopts the inner city definition established by ICIC and cluster definitions developed by the U.S. Cluster Mapping Project . ICIC defines an inner city as a set of contiguous census tracts in a city that have higher poverty and unemployment rates than the surrounding region and, in aggregate, represent at least five percent of a central city’s population. ICIC identifies 328 inner cities belonging to 328 central cities and 188 MSAs.

The Delgado and Zeuli findings offer several important policy implications for inner city development. First, to be effective, inner city job creation strategies should focus on clusters that are strong not just in the inner city, but also in the central city and MSA to leverage competitive advantages present within a region, which is necessary to create sustained growth but too frequently overlooked.

Without a deeper understanding of regional, city, and inner city economic relationships, and without linking job creation strategies to strong clusters, the authors suggest that policies such as empowerment zones will be less effective, especially in areas where cluster linkages between the inner city and the rest of the region are broken.

The Resurgence of America’s Inner Cities

“Are America’s Inner Cities Competitive Again?,” by T. William Lester, Daniel Hartley, and Nikhil Kaza, uses new data from the Census Local Origin-Destination Employment Statistics to analyze employment and growth trends in the inner city in 2002–2011. The authors employ two definitions of the inner city that are broader than that used in Delgado and Zeuli.

Their research was motivated by the new wave of residents moving into downtown neighborhoods in many cities. The authors find significant employment growth in inner cities between 2002 and 2011. In addition, a significant number of metros have “competitive” inner cities, which are defined as having an increasing share of metro jobs in growing MSAs. Their research suggests a few key drivers of growth that include the presence of hospitals/health care facilities and universities, as well as indicators of gentrification. High-poverty areas still constrain employment growth across census tracts.

Barriers to Creating Inner City Economic Opportunity

In their article, “Impacts of Owner Race and Geographic Context on Access to Small-Business Financing,” Timothy Bates and Alicia Robb focus on the impact of race and the neighborhood context on small business owners’ access to bank loans. The literature has revealed difficulties in accessing capital by businesses in inner cities and minority neighborhoods. Existing studies, however, have not effectively answered the question of whether racial discrimination leads to the small business financing problem in inner cities and minority neighborhoods.

Using Kauffman Firm Survey data and logistic regression analysis, Bates and Robb examine various factors associated with the probability of being discouraged borrowers (defined as business owners who are in need of bank loans but do not apply in fear of being rejected). All else equal, being located in minority neighborhoods (or inner cities) does not significantly increase the chance of being discouraged borrowers. However, black and Latino business owners are significantly more likely to be discouraged borrowers, regardless of the neighborhood context. Therefore, the results support the racial discrimination thesis—or, as the authors write, “Race, not space, emerges as a key factor explaining the high discouraged-borrower incidence typifying urban minority communities.” Minority borrowers face more scrutiny and receive less assistance when applying for bank loans than their white counterparts.

From a policy perspective, Bates and Robb suggest that it is important to enforce the Equal Opportunity Credit Act, which prohibits racial discrimination in banking. They also discuss the much needed efforts to encourage minority business owners to complete loan applications despite being discouraged.

Final Thoughts

These research papers offer compelling new evidence regarding the state of inner cities in America and point to tangible policy prescriptions that would help foster greater and more equitable economic growth in the country’s distressed urban areas. The special issue of EDQ, featuring a commentary by Michael Porter that frames the discussion about inner-city economic development, can be accessed online at http://edq.sagepub.com/.

Clearly, there is still much to learn about how to ignite inner city economic development, but the research included in this special issue provides a solid foundation on which to develop future research.